Fed tapers bond-buying program down to $45B US a month

Federal Reserve chair Janet Yellen says the economic news is mixed, but the U.S. economy seems strong enough to allow tapering of the bond-buying program to $45 billion a month. (Paul Beaty/Associated Press)

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The U.S. Federal Reserve has announced it will continue tapering in May, reducing its monthly purchases of U.S. bonds to $45 billion US.

The central bank noted mixed economic news since its last meeting in March, including a high unemployment rate, rising household spending, slow housing sector and business investment that edged down.

But it said it expects improvement in the U.S. economy throughout the spring, adding that “economic activity will expand at a moderate pace and labour market conditions will continue to improve gradually.”

The Dow Jones and S&P 500 indexes bounced upward on the news, which had been widely expected by investors.

The Federal Open Market Committee, headed by Fed chair Janet Yellen, said there is “sufficient underlying strength in the broader economy” to make a further measured reduction in the pace of its asset purchases.

The Fed has been buying U.S. Treasury securities and mortgage-backed securities since 2008 in an effort to boost the U.S. economy and ease credit conditions.

It began tapering the pace of its buying, formerly at $85 billion US a month, in January. It says it will “likely reduce the pace of asset purchases in further measured steps at future meetings” later this year, depending on economic conditions.

The Fed has set dual targets of “maximum employment” and an inflation rate of two per cent before it will raise the rate at which it lends funds to other banks.

Yellen removed the fixed target of 6.5 per cent unemployment last month, emphasizing the Fed believes a “highly accommodative” monetary policy will be appropriate for some time after that target is passed.